In a Limited Liability Company, also known as an LLC, the operating agreement serves as a guide. This agreement helps to guide you through the process of dealing with questions of ownership, as well as business management. Overall it outlines a clear set of rules that govern the organization.
The operating agreement might include voting rights of members, management structure, how new members can be admitted, as well as the procedure should you want to dissolve the LLC, as well as the allocation of profits and losses. Although an operating agreement is not required in most states, there are many benefits to having one.
How Operating Agreements Work in LLC’s
Although the purpose of forming an LLC is to protect your personal assets, there are situations in which members may be liable for their actions and the protection of the LLC does not apply. If you personally guarantee debts, you may then find yourself personally liable for any debts of the LLC, including business loans. The operating agreement proves the LLC is legitimate and facilitates the protection of the duties of all members of the LLC.
Am I Required to Have an Operating Agreement?
In most states you are not required to have an operating agreement. The state of Wyoming does not require an operating agreement but that does not mean you shouldn’t create one.
Despite it not being required in most states, it is a bit dangerous to be without one. Even if you trust your partners in business, you never know what might come up, and having a bit of security never hurts.
What Needs to be Included in an Operating Agreement?
When creating an operating agreement there are a few key items necessary to the agreement, these include:
- Name of LLC
- Information about the articles of organization
- Duration of the LLC
- Powers and duties of members and managers
- Address
- Name and address of the registered agent
- Business purpose
- Percentage of ownership for each member
- Voting rights and responsibilities
- Distribution of profits and loses
- Buyout and buy-sell rules
- Procedures for transferring interest
Why Operating Agreements Are Important
Prevent Disputes Between Members
Your operating agreement will essentially lay out all of the rules in your organization. This means that if there is a dispute, the operating agreement can be referred to, in order to settle the disagreement.
Protect Limited Liability Status
Although LLCs are formed to protect the interests of the members of the group, sometimes your personal liability is still up for discussion. This is why you should create an operating agreement. It will protect you, and avoid jeopardizing your liability as you would with a sole proprietorship or partnership.
Clarify Verbal Agreements
Oftentimes members of an LLC might have agreed to terms orally. Although this can be considered a legal verbal agreement, nothing can be proven if it is not in writing. Another problem with oral agreements is that misunderstandings and miscommunications are inevitable. This is why you want to have your operating agreement to refer to in case of an argument.
Legally Protect your Agreement
In Wyoming, if you don’t have an operating agreement the state will govern your LLC. Each state outlines default rules, then you are bound to those rules if you do not put your own in place. Rather than be forced to follow the rules outlined by the state, it is a good move to create your own.
Should I Have an Operating Agreement?
You most likely formed a Wyoming LLC to avoid personal liability, operating agreements can help make that happen. Every LLC or holding company should create an operating agreement. Not only does it provide you with a clear set of rules, but it helps you to avoid any potential consequences that might occur.
Although an operating agreement might be a small investment of both time and money, the benefits are essential to your success as an entity. Not sure where to start? At Wyoming Trust & LLC we can help draft up an operating agreement for your LLC, to ensure that you have a clear written set of definitive rules for your company. Contact us today.